Nasdaq Clearing

Financial Resources

Financial Resources

The first protection layer to ensure that Nasdaq Clearing can fulfill its obligation is its conservative margining methodology, its collateral requirements, and its pro-active risk management. 

The second protection layer is its risk-bearing capital, which is its dedicated capital resources specifically designed to cover counterparty losses, i.e. to handle extreme situations where the defaulting member’s pledged collateral and other resources are insufficient. The buffer capital to cover for such a scenario is referred to as the Clearing Capital. This is made up of several tranches. 

The first tranche in the Clearing Capital, which would be utilized first in the event of a counterparty default, is Nasdaq Clearing’s own funded capital. This means that Nasdaq Clearing’s own risk-bearing capital is at risk. Thus, Nasdaq Clearing has a fully vested interest in ensuring that risk management routines are applied at all times to provide for the accurate measurement, reasonable control and satisfactory protection against risks arising within the clearing organization. 

The second tranche of the Clearing Capital consists of member contributed default funds, one for the cleared instruments within the financial market, one for the cleared instruments within the commodity market, and one for cleared instruments within the seafood market.. The member contributed default funds ensure that the clearinghouse and its members are aligned and share the same interest of protecting the clearinghouse from counterparty losses. 

In addition to the Clearing Capital, Nasdaq Clearing holds capital to cover for other types of risks, as well as additional capital to ensure an orderly wind-down. For updated information about Nasdaq Clearing’s capital resources, please visit the section Waterfall »

Clearing Capital 

  • Nasdaq Junior Capital. In the event of a counterparty default where the defaulting counterparty’s posted margin and default fund contribution is not sufficient to cover the cost of closing out the portfolio, Nasdaq Clearing will absorb the first layer of loss. A specific amount of Junior Capital is dedicated for each markets.
  • The Commodities Default Fund, will function as the second layer in the event of a counterparty default where the loss has arisen in the commodities market. The size of the Commodities Default Fund is calculated to withstand a default of either the largest, or of the second and third largest counterparty combined, in an extreme but plausible scenario. Contributions to the Commodities Default Fund are only available to cover default losses in the commodities market.
  • The Financial Market Default Fund will function as the second layer in the event of a counterparty default where the loss has arisen in the financial market. The size of the Financial Market Default Fund is calculated to withstand a default of either the largest, or of the second and third largest counterparties combined, in an extreme but plausible scenario. Contributions to the Financial Market Default Fund are only available to cover default losses in the financial market. 
  • The Seafood Market Default Fund will function as the second layer in the event of a counterparty default where the loss has arisen in the seafood market. The size of the Seafood Market Default Fund is calculated to withstand a default of either the largest, or of the second and third largest counterparties combined, in an extreme but plausible scenario. Contributions to the Seafood Market Default Fund are only available to cover default losses in the financial market.
  • In the event of a counterparty default, Nasdaq Senior Capital would be used as a third layer. The size of this third layer is calculated to be sufficiently large to ensure that, when aggregated with the Junior Capital, Default Funds and Mutualized Default Fund, Nasdaq Clearing will withstand a default of the two largest counterparties, regardless of market, under an extreme but plausible scenario.
  • In the waterfall structure, the Mutualized (combined) Default Fund, is a buffer provided by the clearing members from the commodities market, the financial market and the seafood market. This fourth layer would be used in the event of a default in any of the markets. In other words, it is mutualized between the commodities, financial and seafood markets. The contribution is limited to 15% of each clearing member’s contributions to the Commodities, Financial and Seafood Default Funds.
  • Nasdaq Clearing holds Assessment Power as a final layer in the waterfall. This ultimate layer strengthens the clearing house’s contingent financial resources by committing clearing members to contribute additional capital in the event that prior levels of protection have not been sufficient to cover counterparty default(s). The commitment equals an obligation to provide additional funds up to an amount equal to 100% of each clearing member’s contribution to the Financial Default Fund, the Commodities Default Fund, and the Seafood Default Fund (i.e. not including the contribution to the Mutualized Default Fund). Commitments based on the default fund contributions to the financial market are only available to cover default losses in the financial market, commitments based on the default fund contributions to the commodities market are only available to cover default losses in the commodities market, and commitments based on the default fund contributions to the seafood market are only available to cover default losses in the seafood market. 
Other Regulatory Capital
In addition to capital held to withstand counterparty defaults, Nasdaq Clearing will also hold capital to ensure that it is adequately protected from operational, legal, business, and investment risks. In addition to the funds described above, Nasdaq Clearing will hold sufficient Operational Capital to ensure an orderly winding-down or restructuring.
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